Caterpillar Stock Could Become an Inchworm: JP Morgan

By Avi Salzman

The booming global demand for commodities that has lifted Caterpillar (CAT) in the last few years has run out of steam for the time being, and JP Morgan analyst Ann Duignan thinks its time to head for the sidelines.

JP Morgan has been positive on Caterpillar since 2009 on expectations that the commodity boom, and a rebound in U.S. construction would lift the stock. The proposition held until this year, “our Overweight rating on CAT has been the wrong call in 2012 as the stock has delivered -6% returns vs. the S&P Machinery Sector +10% and the S&P 500 +12%.” Duignan downgraded the stock to Neutral, with a $90 price target. Caterpillar is up 0.1% today to $85.02.

Miners are cutting their capital expenditure budgets, and the Obama administration’s environmental policies could curb activity in the coal industry and other energy sectors.

Caterpillar’s balance sheet is also a concern, because the company may not be able to buy enough shares to lift the stock going forward, says Duignan.

“While the risk of further negative earnings revisions may already be priced into CAT’s stock, we are concerned that the company doesn’t have the balance sheet to support share repurchases as a means to bolster earnings. Its net debt to total capital is 30%, and debt reduction and the dividend remain the highest capital allocation priorities.”

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